Energy Transfer 2019 Growth Plans - Funding Secured

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About: Energy Transfer LP (ET), Includes: ETP.PD
by: Fishtown Capital
Summary

Energy Transfer just priced $4.0 Billion of Senior Notes on very favorable terms.

With this offering, they've eliminated the 2019 CapEx funding gap and near term debt maturities.

Even before a possible credit rating upgrade later this year, these favorable terms show improved trust from the bond market.

Energy Transfer (ET) just announced pricing on $4.0 Billion of Senior Notes on favorable terms.

  • $750 million of 4.500% senior notes due 2024
  • $1.5 billionaggregate principal amount of 5.250% senior notes due 2029
  • $1.75 billionaggregate principal amount of 6.250% senior notes due 2049

The funds will be used to

  • Repay in full its $1.22 billion term loan due February 2, 2024
  • Repay $400 Million of 9.70% senior notes due March 15, 2019
  • Repay $450 Million of 9.00% senior notes due April 15, 2019
  • Repay $150 Million of 8.125% senior notes due June 1, 2019
  • Repay a portion of the borrowings under its revolving credit facilities

The rest will be used for general corporate purposes, likely to fund the already announced growth projects for 2019 and 2020.

Mind the Gap

In Q3 2018, the first quarter after the completion of the merger that resulted in a distribution cut to former ETP unit holders, the newly combined Energy Transfer had $600 million in excess distribution coverage. Annualized, this is $2.4 billion of excess coverage with upside from growth projects being placed in service during 2019. This was great news as it looked like Energy Transfer was able to self fund both the equity and debt portions on already announced growth projects.

But Energy Transfer also announced additional major capital projects including a 7th NGL Fractionator in Mont Belvieu and an expansion of the Lone Star Express Pipeline. This surprised and disappointed some investors, including myself, who wanted Energy Transfer to live within its cash flow and hold off on additional growth projects in order to delever faster.

Energy Transfer guided to $5 billion in CapEx for 2019, which was higher than many anticipated and was questioned multiple times by analysts on the Q3 Conference Call. This left a funding gap of $2-2.5 billion for growth projects, plus an additional billion for the debt maturities due in the late Spring.

Why this is so positive

While a bond offering is usually nothing to get too excited about as an investor, this one is a big positive to me for two main reasons.

  1. It removes an overhanging question on how the additional growth projects and debt rollovers would be funded. Last year Energy Transfer issued relatively high interest rate 7.625% preferred shares to fund some of their growth. This was done primarily due to leverage concerns, as the ratings agencies only count preferred shares as half debt. As a unit holder, having to issue higher interest preferred shares because of leverage concerns is not what I want to see.
  2. The terms of the deal were excellent, substantially equivalent to the offering done this past June despite BBB credits spreads, as measured by the ICE BofAML US Corporate BBB Option-Adjusted Spread significantly widening since then.

I believe this is an encouraging sign for a 2019 credit rating upgrade once additional growth projects come online and EBITDA and distributable cash flow improve further. The fundamentals continue to improve for Energy Transfer and units could get back to their 52 week high above $19 faster than many people think.

Disclosure: I am/we are long ET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.